ECB Rate Decision Quick Analysis: Expanding economic support for the eurozone

Central bank increases the Pandemic Emergency Purchase Program by €600 billion.
Bond program proceeds to be reinvested until at least the end of 2022.
Interest rates unchanged at 0.0%, deposit at -0.5%.
Euro has gained 3.5% against the dollar since May 18 as panic pricing ebbs.

Joseph Trevisani FXStreet

The European Central Bank brought its bond purchase program limit to €1.3 trillion in an effort to help member states cope with the expense of rebuilding their economies after the coronavirus pandemic.

Citing the downward pressure on inflation the bank stated, “The PEPP expansion will further ease the general monetary policy stance, supporting funding conditions in the real economy, especially for businesses and households.”

The timeframe of the PEPP purchases will last until at least the end of June 2021 or until the governors determine that the “coronavirus crisis phase is over.” The bank also committed to reinvesting the maturing principal proceeds of the PEPP program until at least the end of 2022. The main refinance rate was left unchanged at 0.0% and the deposit rate at -0.5%

Euro rises

The move by the central bank had been widely expected and largely priced into the euro. The united currency which has added 3.5% against the dollar in the last three weeks rose about 65 points to 1.1272 in response to the announcement.

ECB President Christine Lagarde has repeatedly asked European governments to provide more fiscal support to the bloc’s faltering economy. The recent announcement of a €750 billion recovery plan is expected to complement the bank PEPP efforts.

The ECB program is designed to assist government restrain their borrowing costs by using its leverage to buy bonds and curb the interest rate demanded by the credit market. It does not lend directly to countries and firms.

The EU program administered by the EU Commission will distribute two-thirds of the monies in grants, as per the demand of France and Germany, and the balance in loans.

The debt to GDP ratio across the eurozone is expected to be over 100% by the end of this year, with the top five nations in descending order Greece, Italy, Portugal, France and Spain.

The ECB has said that it anticipates an increase of national debt by €1.0 trillion to €1.5 trillion this year and an average budget deficit of 8%. The EU will also borrow €750 billion with its new recovery fund.

Author

Joseph Trevisani

FXStreet

Joseph Trevisani began his thirty-year career in the financial markets at Credit Suisse in New York and Singapore where he worked for 12 years as an interbank currency trader and trading desk manager.

AUD/USD hangs below mid-0.7100s amid bullish USD, ahead of FOMC meeting

AUD/USD remains on the back foot during the Asian session on Tuesday, close to an over three-week low touched the previous day. US bond yields hold near multi-year highs ahead of the FOMC meeting and oil-driven inflation risks, supporting the US Dollar and weighing on the currency pair. However, rising RBA rate-hike bets could limit deeper losses for the Aussie.

USD/JPY sticks to gains near mid-154.00s as traders await Fed/BoJ meetings

USD/JPY attracts some buyers for the second straight day on Tuesday, though it remains below a one-week high touched the previous day as traders await the FOMC and BoJ meetings this week. Meanwhile, Fed rate-hike bets and oil-driven inflation risks keep US bond yields near multi-year highs, supporting the US Dollar and the currency pair. That said, a more hawkish repricing of the BoJ normalization path might continue to underpin the Japanese Yen and cap spot prices.

Gold seems vulnerable below $4,300 as traders await FOMC meeting

Gold struggles below $4,300 during the Asian session on Tuesday and remains vulnerable near a one-month low, touched the previous day. Fed rate-hike expectations and inflation concerns remain supportive of elevated US bond yields, underpinning the US Dollar and weighing on the non-yielding bullion. Bears, however, might wait for the outcome of a two-day FOMC meeting on Wednesday before placing fresh bets.

Bitcoin pushes past $79K as markets anticipate Fed meeting, Strategy stays put

Bitcoin rose above $79,000 on Monday as the broader crypto market enters a closely watched week for policymakers. According to QCP analysts, markets have largely priced in a 25-basis-point Federal Reserve rate increase after the release of August inflation data last week. The focus has shifted toward how policymakers communicate their outlook for future rate moves.

Eight reasons why the Fed should raise rates

The FOMC meeting on September 15–16 is expected to mark a turning point with the Fed’s first rate hike since May 2023. While there may have been economic reasons to hold off and maintain the status quo until now (some negative signals on the employment front and some encouraging ones on the inflation front), the conditions for a necessary recalibration now appear to be in place.

Venezuela’s 65-billion-barrel Oil deal could reshape America’s inflation fight

The United States (US) has secured unprecedented access to part of Venezuela’s vast Oil reserves. The timing is particularly significant as the war with Iran is disrupting Middle Eastern supplies, keeping energy prices elevated and reviving concerns about inflation.